Overcoming tax filing predicaments under TRAIN

05 Feb 2019

The comprehensive tax reform program (CTRP) was envisioned to redesign the Philippine tax system to be simpler, fairer and more efficient. Aligned with the said objectives, the first package of the CTRP or the Tax Reform for Acceleration and Inclusion (TRAIN) Law brought many changes on the overall tax compliance procedures. Some of these changes are the streamlined filing of tax returns, adjustments to tax payment deadlines, and revision of tax rates, the implementation of which requires the Bureau of Internal Revenue (BIR) to update its system and issue revised tax returns.

More than a year after the passage of the TRAIN Law, however, the necessary updates are not yet fully in place. As a result, many taxpayers are having difficulties in trying to comply and keep up with the new rules. To be fair, the BIR actually issued many circulars and advisories to inform taxpayers about the workaround procedures during the transition period.

Here are some of the updates already available and workaround procedures to guide you.

Fringe Benefits Tax (BIR Form No. 1603). The fringe benefits tax (FBT) rate was increased from 32% to 35%, and the deadline for filing and payment was moved to the last day of the month after the close of the calendar quarter. A revised return (BIR Form No. 1603Q) is already available for manual filers. For Electronic Filing and Payment System (EFPS) users, an enhanced BIR Form No. 1603 is being used, wherein the tax rate has been revised to 35%. The deadline for filing and payment, however, has not been updated. Thus, if a taxpayer will file after the old deadline (15th day after the end of the quarter), penalties for late filing and/or payment will be automatically computed. Through Revenue Memorandum Circular (RMC) No. 28-2018, taxpayers were advised to disregard the penalties computed by the system and pay only the basic tax due, provided that the payment shall be made on or before the last day of the month.

The enhanced BIR Form No. 1603 became available only during the second quarter of 2018. Thus, many taxpayers are at a loss on how to remit FBT for the first quarter of 2018. If you used a Payment Form (BIR Form No. 0605) to remit the 35% FBT, do not be surprised if the failure to file BIR Form No. 1603 for the first quarter 2018 will appear as an open case in the BIR’s records. For taxpayers who filed BIR Form No. 1603 for the first quarter of 2018, but remitted the FBT at the rate of only 32%, as reflected in the old form, remitting the 3% deficiency FBT now will incur penalties on the amount you failed to remit on time.

Final Income Taxes Withheld on Interest Paid on Deposits and Yield on Deposit Substitutes/Trusts/Etc. (BIR Form No. 1602). The filing of BIR Form No. 1602 by banks, non-bank financial intermediaries, and other institutions is now quarterly rather than monthly. The revised return (BIR Form No. 1602Q) is not yet available in the EFPS as of this writing, hence, the old BIR Form No. 1602 is being used. The BIR still requires the monthly remittance of taxes withheld; thus, the Monthly Remittance Form of Final Income Taxes Withheld (BIR Form No. 0619F) should be filed with tax type code “WB” for the first two months of the calendar quarter.

Based on RMC No. 27-2018, the BIR requires that the amount to be indicated in the quarterly BIR Form No. 1602 shall be the total amount for the quarter. However, this proves to be impracticable, since there is no portion in the old BIR Form No. 1602 where taxpayers can present the remittance made for the first and second months as credits. As a result, many taxpayers report only the amount of tax base and taxes due for the third month in the supposedly quarterly return.

The final withholding tax rate on interest income from foreign currency deposit units or FCDU (except for resident foreign corporations) was increased from 7.5% to 15%. Since the rate is not yet updated in BIR Form No. 1602, the balance of 7.5% should be remitted using BIR Form No. 0605.

The due date for filing the quarterly BIR Form No. 1602 has not been updated as well. Hence, if you file beyond the old deadline — even though made within the new deadline, which is the last day of the month following the end the quarter — the EFPS automatically computes penalties for late filing and/or payment. Taxpayers should, likewise, proceed in paying just the basic tax due and ignore the penalties.

Quarterly Remittance Return of Taxes Withheld (BIR Forms No. 1601-EQ and 1601-FQ). The new BIR Forms No. 1601-EQ and 1601FQ, which are filed quarterly, are now available manually and electronically, along with the Monthly Remittance Form of Creditable Income Taxes Withheld (BIR Form No. 0619E) and BIR Form No. 0619F. Most of the concerns, however, are on the submission of the attachment which is the Quarterly Alphalist of Payees or QAP (formerly Monthly Alphalist of Payees or MAP). Although taxpayers consolidate all transactions during the quarter in BIR Forms No. 1601-EQ and 1601-FQ, the QAP is not a single consolidated listing of income payees from whom taxes were withheld during the quarter. Taxpayers still prepare an alphalist for each month of the quarter and submit the lists simultaneously upon filing the quarterly withholding tax returns.

Annual Information Return of Income Taxes Withheld on Compensation and Final Withholding Taxes (BIR Form No. 1604-CF) and Alphalist of Employees/Payees. Based on Revenue Regulations (RR) No. 11-2018, taxes withheld on compensation and final withholding taxes are to be reported in separate annual information returns. However, revised BIR Form No. 1604-C and BIR Form No. 1604-F have not been issued in time for filing last January 31. Accordingly, taxpayers used existing BIR Form No. 1604-CF.

For 2018, the deadline for submitting the alphalist of employees/payees as an attachment to BIR Form No. 1604-CF was extended from January 31 to February 15, 2019, considering the delay in the issuance of an enhanced Data Entry and Validation Module (version 6.1). The enhanced validation module was issued pursuant to the changes implemented by the TRAIN Law in computing for withholding tax on compensation, particularly the repeal of personal exemptions.

The alphalist of employees/payees can be generated using the said BIR Data Entry Module. It can also be prepared in an Excel spreadsheet, following the prescribed format and converting the spreadsheet to Comma Separated Value (.csv) file or “.dat” format. A tip for Excel spreadsheet users: you can just leave as blank the columns for the employees’ status and exemptions in the old format, and the converted file would still be validated.

Annual Income Tax Returns (BIR Forms No. 1700, 1701 and 1702-RT/EX/MX). The TRAIN Law provides that income tax returns shall consist of a maximum of only four pages in paper or electronic form. Pursuant to this and the updates in personal income tax rates, the BIR issued revised/new BIR Form No. 1700 (for individuals earning purely compensation income), BIR Form No. 1701A (for individuals earning income purely from business/profession under graduated income tax rates availing of Optional Standard Deduction or those who opted to avail of 8% flat income tax rate), and BIR Form No. 1702-EX and 1702-RT (for corporations, partnerships and non-individuals exempt from tax and subject to regular tax rate, respectively), which are all available manually. The said two- to four-page income tax returns are simpler than the four- to 12-page returns that taxpayers used to accomplish under the old rules.

Revised annual income tax returns for individuals availing of Itemized Deductions, mixed-income earners, and corporations and other non-individuals with income subject to multiple tax rates or subject to special tax rates are not yet available. Hopefully, the said tax returns, as well as electronic versions of all the income tax returns, will be available before the filing deadline on April 15.

The track being travelled by TRAIN may well be paved with good intentions, but it is not yet a smooth one. Until TRAIN reaches its full implementation, it pays to know the BIR’s issuances and advisories to avoid failed compliance and unnecessary stress. In all cases, it is best practice to keep copies of the tax returns filed and document the workaround procedures citing the relevant BIR issuances.

Good luck and let the tax filing season begin!

John Paulo D. Garcia is a senior of the Tax Advisory and Compliance Division of P&A Grant Thornton. P&A Grant Thornton is one of the leading audit, tax, advisory, and outsourcing services firms in the Philippines.